This chapter explains the main features of the Argentine insolvency proceedings. Insolvency proceedings in Argentina are governed by the Bankruptcy Law, No. 24,522 as amended, which provides for two restructuring schemes: a formal full plenary reorganisation proceedings, similar to the reorganisation procedure regulated under Chapter 11 of the United States Bankruptcy Code, and an out-of-court reorganisation agreement, which is similar to the US prepackaged restructurings; and a liquidation proceeding.
- Reorganisation proceeding
- Out-of-court restructuring agreements
- Prepetition void or voidable transactions
- Liability of shareholders, managers and other third parties
- Cross-border insolvencies
- Proposed amendments in response to the covid-19 pandemic
Referenced in this article
- The Bankruptcy Law, No. 24,522
- General Companies Law, No 19,550
- Civil and Commercial Code
- Criminal Code
- UNCITRAL Model Law on Cross-Border Insolvency
Reorganisation proceedings in Argentina are only voluntary. Debtors may file a voluntary petition for reorganisation at any time prior to bankruptcy adjudication. Admission of the petition requires the filing of evidence showing that the debtor is insolvent (in ‘payments cessation’, or unable to comply with its current liabilities as they become due) and that at least one year has elapsed since a court declaration of performance of a prior reorganisation, if applicable.
In addition, debtors adjudicated bankrupt may request the conversion of the bankruptcy adjudication into a reorganisation proceedings to the extent that the bankruptcy was not adjudicated as a consequence of the breach of a reorganisation plan while a reorganisation proceeding was pending or before a year has elapsed since a court declaration of performance of a prior reorganisation plan.
Effects of commencement of a reorganisation
The commencement of a reorganisation proceedings has the following main effects:
- the debtor keeps in possession, but the administration of its assets is subject to the supervision of a receiver appointed by the court;
- all creditors will be required to file proof of claims before the receiver;
- in the case of need or urgency, the court may order the temporary suspension of secured credits enforcement and precautionary measures on collateral secured with mortgage or pledge for a period of no more than 90 days (interests accrued during the suspension will enjoy the preference of administrative expenses);
- the debtor is banned from entering into any transactions without consideration or that may affect the status of prepetition claims;
- within the 10 days following the filing by the receiver of the report on labour claims, the court will authorise the ‘prompt payment’ of the labour claims without need to file proof of claims;
- any of the following transactions requires the prior authorisation of the court, after a hearing with the receiver and the creditors’ committee: transactions on registered property; disposition or lease of goodwill; issuance of secured bonds; granting of pledges; and any other transaction not within the ordinary course of debtor’s business;
- the accrual of interest on prepetition unsecured claims is suspended; and
- all proceedings in connection with prepetition unsecured monetary claims are stayed, and are consolidated at the court that is the venue for the reorganisation proceedings.
The reorganisation plan
Creditors must be classified in at least three categories: unsecured creditors, labour creditors and secured creditors. The debtor may also create additional categories within each of the foregoing based on objective criteria. Each class could be offered different reorganisation proposals.
The debtor enjoys a non-compete or exclusivity 90-day period, extendable by up to 30 additional days (the exclusivity period) during which it must formulate a reorganisation plan and obtain the consent of the required majorities of creditors.
The plan must be consented to by unsecured creditors (excluding controlling shareholders) representing, within each class of unsecured creditors, more than 50 per cent of all unsecured creditors, determined on a headcount basis and at least 66.66 per cent of the aggregate principal amount, plus accrued interest as of the petition date (the requisite majority).
Consent of creditors holding debt securities issued in series (ie, notes) must be granted at a holders’ meeting for each series or in such other manner as provided in the indenture, subject to the court’s discretion. Securities holders’ meetings are subject to the following rules:
- for purposes of computing the headcount majority, all votes of each series consenting to the plan will be computed as given by one person and all votes rejecting the plan will be computed as given by one person; and
- the aggregate principal amount of the securities held by the holders consenting to the plan will be computed for determining the principal majority, provided that for the purposes of calculating the principal majority the principal amount of the notes not appearing at the meeting or otherwise not voted will not be computed.
Any proposal to secured creditors must be approved by unanimous consent of those creditors.
Challenge and failure of the reorganisation
Creditors with voting rights on the plan and those that have initiated ancillary proceedings for late filing of proof of claims or disallowance can challenge the plan only on the following grounds:
- irregularities in the computing of the required majorities;
- lack of powers of the creditors’ representatives who consented to the plan and whose vote was necessary for obtaining the required majorities;
- fraudulent increase in liabilities;
- concealment or fraudulent exacerbation of the assets; and
- breach of material formalities in the process (only creditors not consenting to the plan).
The reorganisation plan may also be challenged if its terms are deemed abusive (highly disproportionate). However, in this case, in general the courts have granted the debtor an opportunity of improving the terms of the plan, with or without the need for new consent from the creditors (what has been called the ‘third way’). The court resolution admitting the challenge will include the bankruptcy adjudication and the resolution rejecting the challenge will include the endorsement of the plan.
In addition, a plan duly endorsed may be declared null and void by request based on the wilful exacerbation of the liabilities, recognition or simulation of non-existent or unlawfully granted securities, concealment or exacerbation of the assets, which become known after the statutory term for challenging the plan (as described above) has elapsed. The court resolution admitting the petition will include the bankruptcy adjudication.
If, at the end of the exclusivity period, the debtor does not receive approval for the plan from the required majorities, the court may exercise the cramdown power and therefore endorse the plan if:
- the plan was approved by the requisite majorities within at least one of the impaired classes of unsecured creditors and unsecured creditors representing at least threequarters of the aggregate principal amount of the impaired unsecured credits;
- the plan does not discriminate the opposing classes by banning the creditors of such classes from choosing among the available alternative reorganisation options, if any, or otherwise the consideration received by the opposing classes is not of inferior value than that received by the accepting classes; and
- payment received under the plan is not less than the dividend the opposing creditors would receive in the liquidation.
If the court does not exercise the cramdown power, then the court will declare the debtor bankrupt. If the debtor is a limited liability company, corporation, cooperative or company with state participation, before declaring the debtor bankrupt, the court must open a five-day period for the registration of the creditors, workers’ cooperative or other third parties interested in acquiring the debtor’s equity and formulate alternative competing reorganisation plans. The debtor may also file a new competing plan. If there is no alternative reorganisation plan or no plan is consented to by the requisite majority of creditors, then the court will declare the debtor bankrupt.
If the debtor fails to perform the plan, wholly or partly, the court will declare it bankrupt upon the request of the creditors or the controlling committee. The court will adjudicate the debtor bankrupt without petition if the debtor declares that it is impossible for it to comply with the plan in the future.
Conclusion of the reorganisation
A reorganisation proceeding may be concluded by involuntary withdrawal if the debtor fails to:
- deliver the corporate books to the court or to deposit the amounts for the payment of mailing notices within the three days of the reorganisation commencement resolution notice; or
- publish the commencement notices within five days of the reorganisation commencement resolution.
In addition, a reorganisation proceeding may be concluded by voluntary withdrawal prior to the first publication of notices, without the consent of the creditors, or prior to the beginning of the exclusivity period, with the consent of unsecured creditors holding at least 75 per cent in principal amount of unsecured claims.
Once the plan is endorsed and performed, at the request of the debtor the court will issue a resolution declaring the reorganisation concluded, finalising the intervention of the receiver, and a resolution declaring the reorganisation plan performed.
The out-of-court restructuring consists of an agreement that the debtor enters into with all or a portion of its unsecured creditors (classified under objective criteria similar to that of the reorganisation proceedings) for the restructuring of their unsecured claims. If the agreement is executed or consented to by unsecured creditors representing the requisite majority of unsecured creditors, the agreement may be filed for court endorsement, upon which the restructuring will be binding against non-party unsecured creditors. Restructuring of secured claims requires the consent of each secured creditor.
Admission of the petition does not necessarily require the filing of evidence showing that the debtor is in cessation of payment and is sufficient proof that the debtor is experiencing financial difficulties.
Effects of admission of an out-of-court restructuring
Upon admission of the out-of-court restructuring, all prepetition unsecured claims against the debtor are automatically stayed. The admission of the petition does not have an effect on secured claims.
The terms of the restructuring
The out-of-court restructuring agreement is subject to the same terms and requirements of a reorganisation plan.
Other than the general principles of law and the laws in effect from time to time, there are no limitations to the restructuring terms. With certain limited exceptions, discussed below, the Bankruptcy Law (ABL) does not provide for a substantive review of the restructuring terms under the out-of-court restructuring.
The unsecured creditors can be classified based on objective criteria and each class could be offered different restructuring proposals, provided that each proposal is consented to by the requisite majority of the unsecured creditors within each category.
Challenge and failure of the out-of-court restructuring
The unsecured creditors listed by the debtor upon filing the petition for endorsement of the out-of-court restructuring, and those showing proof of having been excluded from this listing, may challenge the out-of-court restructuring agreement based exclusively on omissions or exacerbations of the assets or liabilities or the lack of the requisite majorities. However, the agreement may also be challenged if its terms are deemed abusive (highly disproportionate).
Even if the out-of-court restructuring agreement is confirmed, it may be declared null and void upon a motion filed after confirmation based on wilful misrepresentation in the assets and liabilities statement, or the creation of illegitimate preferences in favour of certain creditors.
Under the ABL, a bankruptcy proceeding may be commenced either voluntarily, upon the petition of the debtor, or involuntarily, upon the petition of a creditor. It is a condition of filing the petition that the debtor be insolvent.
After an involuntary petition is filed, the court summons the debtor to file evidence of solvency (generally achieved through the deposit of the amounts owed to the petitioner). If the debtor does not file evidence of solvency, the court will adjudicate the debtor bankrupt. After bankruptcy adjudication, the debtor may file a petition for converting the bankruptcy adjudication into a reorganisation.
The bankruptcy proceeding
Upon bankruptcy adjudication, the court will appoint a receiver who will take possession of all the assets of the debtor.
All creditors must file proof of claims, preferences and priorities and provide the receiver with information as to the total amount, reason and privileges of each claim.
The commencement of a bankruptcy proceeding has, inter alia, the following main effects:
- actions taken by the debtor in respect of property of the estate, as well as payments made or received, are void by operation of law;
- the debtor’s former managers are required to relinquish custody of the business, including all books, records, real property and equipment, to the receiver and are required to provide the court all assistance required;
- the accrual of interest on unsecured claims is suspended;
- all actions to enforce unsecured claims against the debtor that are not secured by a pledge or mortgage are suspended and the commencement of similar actions against the debtor are prohibited;
- all actions on unsecured claims against the debtor are consolidated before the court hearing the bankruptcy; and
- all pending payment obligations of the debtor are accelerated, so that all such obligations are treated as due as of the date of the filing of the bankruptcy petition.
If there is no decision on the continuation of the debtor’s activities, the receiver will conduct the liquidation of the assets of the estate.
The receiver will file with the court a proposal for the distribution to the creditors of the proceeds obtained from the liquidation of the debtor’s assets, considering the rank of each credit in the payment allocation provided by the ABL as described below.
After liquidation, expenses and claims enjoy the following order of preference in payment:
- claims with special preference, with priority of payment in respect of the proceeds of the assets affected in each case (including credits secured with mortgage or liens);
- administrative expenses (including debts incurred in connection with the administration of the case and with the maintenance, administration and liquidation of the property of the estate);
- claims with general preference (including certain labour claims and the principal amount of contributions to social security and taxes, excluding interest);
- unsecured claims; and
- subordinated claims.
Prepetition void or voidable transactions
Upon adjudication of bankruptcy, the court will fix the debtor’s cessation of payment date (insolvency date), which cannot be more than two years before the reorganisation petition date (if bankruptcy is adjudicated as a consequence of the failure of a reorganisation) or the bankruptcy adjudication date (if bankruptcy is adjudicated directly). The period from the date of cessation of payment to the reorganisation petition date or the bankruptcy adjudication date is defined as the clawback period.
The following transactions made by the debtor within the clawback period are void:
- transactions without consideration;
- advance payments on debts that are due on or after the bankruptcy adjudication date; and
- granting of security or any other preference in respect of debts not due and not originally secured.
Any other transactions detrimental to the debtor’s creditors made by third parties with knowledge of the debtor’s insolvency during the clawback period are voidable. The third party has the burden of proving that the transaction did not cause any detriment to the debtor’s creditors.
Liability of shareholders, managers and other third parties
Liability of ‘limited liability’ shareholders
There are certain grounds of joint and several liabilities of ‘limited liability’ shareholders under the General Companies Law, No. 19,550 (GCL). The shareholders are liable for the damage caused to the debtor as a result of their wilful misconduct or negligence and for any damage caused by acts of the debtor that concealed the shareholders’ pursuit of their own interests or that constituted a cover for shareholders breaching the law, violating principles of public policy or good faith, or frustrating third parties’ rights (piercing of the corporate veil).
In addition, under the ABL, the bankruptcy of a debtor may be extended to its controlling shareholders:
- who used the debtor to perform acts in their own interest and to the detriment of the debtor’s interest, and disposed of the debtor’s assets as if they belonged to them, deceiving the debtor’s creditors;
- who unlawfully diverted the debtor’s corporate interest, subjecting it to a unified management in the interest of the controlling shareholders or their group; or
- with respect to whom there is confusion regarding ownership of the assets of the debtor, or a major part thereof, that impedes the clear delimitation of the assets and liabilities of each of the parties.
Liability of managers and other third parties
Pursuant to the GCL, the managers of the debtor are jointly and severally liable for all damages arising from the breach of their fiduciary duties, the law or the by-laws and in general for any damage deriving from their wilful misconduct, abuse of powers or gross negligence, either by action or omission.
Under the ABL, the managers that wilfully provoked, facilitated, allowed or aggravated the debtor’s financial situation or its insolvency are liable for the damages. Any third party (including the shareholders) who wilfully participated in acts leading to the depletion of the debtor’s assets or to unduly increase the debtor’s liabilities (the ‘exaggeration’ of the debtor’s liabilities), before or after the adjudication of bankruptcy, are liable for damages. The liability described in the foregoing also extends to all acts carried out up to one year prior to the cessation of payment date. Scholars and recent case law confirm that the liability described above requires wilful misconduct.
Pursuant to the Civil and Commercial Code, fraudulent transfers, which have the effect of provoking or aggravating the insolvency of the debtor, between the debtor and a third party who knew, or should have known, the insolvency situation of the debtor, are subject to the civil fraudulent conveyance action. The third party that contracted with the debtor is liable for the damage arising from the transaction against the creditors making the claim. If the third party acted in good faith, his or her liability will be limited to the amount that he or she gained from the transaction.
The Criminal Code provides sanctions of imprisonment for the fraudulent breach of the director’s duties. Any individual wilfully preventing the exercise of a creditor’s right on an asset or guarantee and any debtor adjudicated bankrupt that has deceived its creditors, or made sales in detriment to them, may be prosecuted for fraud.
In addition, pursuant to the ABL, if, after realisation of all assets of the estate, the proceeds are insufficient to satisfy the insolvency proceedings’ costs and expenses – including court tax and professionals’ fees – then the liquidation procedure is closed for lack of assets and, in such case, the ABL creates a presumption of fraud and provides that the court must give notice to the criminal courts for prosecution.
Argentina has not yet adopted the UNCITRAL Model Law on Cross-Border Insolvency and does not recognise effects to main foreign insolvency proceedings of foreign debtors against creditors holding claims payable in Argentina.
Pursuant to the ABL, the commencement of an insolvency proceeding in a foreign jurisdiction constitutes grounds for the filing of a petition for a full plenary liquidation case in respect of the foreign debtor’s assets in Argentina.
The ABL provides for three additional principles in cross-border insolvencies, as outlined below.
The principle of preference for creditors participating in the Argentine liquidation process
In foreign creditors’ liquidation process in Argentina, the creditors participating in the foreign liquidation process will only have the right to get the turnover of the debtor’s remaining assets balance after all the claims of the creditors participating in the Argentine liquidation process have been fully satisfied.
The principle of reciprocity
Participation in an Argentine liquidation case of creditors holding claims payable outside of Argentina, and not participating in a foreign liquidation process, is conditioned upon filing of evidence that, reciprocally, creditors holding claims payable in Argentina are permitted to participate in a liquidation process commenced at the jurisdiction where such claims are payable in equal conditions with the domestic creditors of such jurisdiction. However, an exception is made with respect to creditors holding claims secured with mortgages or liens.
The principle of dividend parity
Payment received by unsecured creditors in a foreign jurisdiction after commencement of a liquidation case under the ABL shall be computed based on the general distribution available to such creditors on account of payments of unsecured claims under the Argentine liquidation process.
Proposed amendments in response to the covid-19 pandemic
The Argentine Congress is in the process of approving a bill on the emergency on insolvencies caused by the covid-19 pandemic. As of 25 October 2020, the bill has still not passed. The proposed bill, originating in the House of Representatives, was approved by the Senate on 15 October 2020. However, as the Senate incorporated certain amendments to the original bill, the proposed amendments must be approved by the House of Representatives in order to the Bill to be passed into law.
Unfortunately, the bill does not address substantive matters not addressed by the ABL, such as debtor-in-possession financing. The bill generally just suspends or extends procedural terms under the ABL, suspends enforcement and attachment actions and restricts bankruptcy adjudications until 30 June 2021 in respect of all reorganisation proceedings commenced, out-of-court restructurings filed for endorsement and bankruptcy petitions filed, between 20 March 2020 and 30 June 2021, as further described below. The benefits of the bill will apply to all debtors that, during the clawback period and during the two years immediately following the passing and enactment of the bill into law, did not and will not:
- make transfers of foreign currency abroad for portfolio purposes or for any other purposes to its shareholders or directly or indirectly related parties, and such funds were not transferred back into Argentina through the foreign exchange market (repatriation);
- make any payments to non-cooperative jurisdictions for tax purposes for or jurisdictions with null or low taxation;
- acquire securities with Argentine pesos and forthwith sell them for foreign currency or transfer them to custody accounts out of Argentina or apply them for the settlement of purchases out of Argentina;
- make any financial investment out of Argentina not repatriated during the same periods.
While the law is effective, after the bill is passed and enacted, in respect of all debtors that comply with the requirements described above:
- the computing of the exclusivity period in ongoing reorganisation proceedings is suspended and the court will have to set a new time schedule commencing from 30 June 2021;
- in reorganisation cases commenced from 20 March 2020, the exclusivity period will be extended to up to 180 days and its extension to up to 60 additional days;
- the following are suspended:
- all enforcement proceedings on any kind of security interests or guarantees on financial debt;
- all judicial and extrajudicial auctions and sales enforcements, including mortgages’ and pledges’ foreclosures;
- the statute of limitations on credits against such debtors and their guarantors;
- for a period of one year, the fixed term for the compliance of reorganisation plans and out-of-court restructuring agreements, and all performances already due until 30 June 2021;
- all bankruptcy petitions; and
- all attachments on bank accounts, except in respect of labour claims ‘prompt payments’; and
- the court tax will be calculated on the amount resulting from the restructuring (therefore deducting from the original amounts owed the amount of any agreed haircuts or deductions, if any), excluding any restructuring agreements on secured indebtedness, if not included in a category under the reorganisation plan or out-of-court restructuring agreement.